After years of soaring budget deficits in California, Governor Jerry Brown last week proposed a budget that was in balance. In fact, there was a one billion dollar reserve. Governor Brown joins Marketplace Morning Report host Jeremy Hobson to discuss how he turned his state around.

On how he managed to get California to a balanced budget after years of deep deficits:

Well, I didn’t just propose it this year. Two years ago, I started by making adjustments and severe reductions in the California state budget. I encountered a $27 billion dollar deficit, and the first year we had to make very painful cuts across a wide swatch of government activity – education, social services, prisons – you name it, we did it. I also asked for Republican support to put a tax measure on the ballot. I could not even get one vote – I needed four. So I had to go to the initiative, which in California is system where with 800,000 signatures one can put a constitutional measure before the people to be voted on. And that’s exactly what happened, that was Proposition 30. It passed overwhelmingly by more than 55 percent of the vote, and that will then inject billions of dollars into our budget so that now we have cut $3, but we’ve also raised $1 from taxation. So together, it’s brought California its first balanced and sustainable budget in 15 years.

On the image of government in today’s politics:

There is a kind of a meme going around Washington and the country that when government does something, it’s bad. Government invests in the National Science Foundation, it invests in our military, it invests in medical research, in the interstate highway system, Amtrak. There’s a lot of good things that are going on. Contrary-wise, in corporations we have banks that cost the country over $7 trillion and drove millions of people out of their homes and out of their jobs. So it’s not about cutting government or cutting banks, it’s about making intelligent decisions about spending money wisely for those things that are important and vital to our common welfare.

On which cuts to the state budget were the most difficult:

Well, I don’t even like to repeat it. We reduced the pensions of the elderly, we cut back on the money that we provide to families that are on our social welfare, the CalWORKS program. We cut 25 percent from the university. We eliminated entirely the state redevelopment program for economic development. We eliminated the subsidy for open space. And on and on – it was brutal. But we’ve come through it, and luckily California is a state that invests more than any other state in its education, its health care, and in other things. So, we start from a very rich base, but we did cut it back, and we did win the respect of the people and $7 or $8 billion this year, and a similar amount over the next several years.

On concerns about California’s long term fiscal future:

We’re not living paycheck to paycheck. People who buy homes take out 30-year mortgages. We have obligations that extend 30 and 40 years from now. We are handling them. California generates $2 trillion of gross domestic product. We’re the ninth largest country, if we were a separate country, in the world. So, yes, we have liabilities – retiree health care, pensions, we also have issued bonds for our roads, for high speed rail, for water projects. We’re building for the future. California is still a golden dream that draws people from all over the world. And we stay that way, not by climbing in a hole, but by getting out and investing and encouraging the most creative among us.

On what makes his state different from Texas:

Can I give you another statistic? Texas has five times more people. They have about ten percent or eleven percent of their population working at either below or at the minimum wage. That devastates families. In California, it's below two percent. So you have to look... Our debt for students coming out of our universities is lower than most of the states. And I would eventually say lower than Texas. So, look, there are times in a decade when one state does better than another. But if you look at the totality -- looking backwards, looking forward -- California has challenges. But we are well positioned to maintain and enhance our role as an innovator for the United States and for the world. By the way, we get fifty percent of the venture capital investment -- the money that goes to the most innovative businesses. So, on that measure, we do a lot better. But Texas has... They're doing well in manufacturing, they're doing well in investing in wind. Maybe they have a lower debt. Maybe their debt is too low. Maybe they should be investing in the kinds of innovation and technology that will serve their citizens in the future.

On whether high taxes will drive people to leave California:

There are studies that show that divorce sends more people out of California than raising the taxes. The taxes in New Jersey, home of Mr. Christie, were raised but people didn’t move to New York or move to Connecticut. So, there will be some leaving. People come, people go. Silicon Valley is the most powerful engine of creativity in the world. If people want to be part of that, they stay here.

Hollywood is also a center, but the other states give lavish subsidies to get people to make movies, and we do that to a degree, but we are not going to have a race to the bottom where the state is supposed to pay for every private sector project we want to attract. That is a losing strategy that I would hope other states would get off.

On what Washington, D.C., can learn from California:

Well, what you learn is the Republicans are really stuck on this no tax pledge. They think starving government is the most important thing in life, and I think that’s preposterous. Not to say that there isn’t waste, not to say that we don’t have to be frugal in government – and I challenge anyone to beat the California model. However, at the end of the day, America has to govern itself. We have two parties, they have got to get out of their comfort zones or America, the superpower, will diminish. This is a big challenge. I don’t know if the Republicans are up to it. I don’t know if the Democrats can entice them or charm them over, but America cannot lead the world in the way that it has historically unless this partisan gridlock is transcended by a vision of what America is. And I would urge those congressmen to go watch the movie “Lincoln” again and see what kind of courage is needed to hold this union together.

On his biggest economic hurdle in the year ahead:

The biggest economic hurdle is, does the federal government screw things up? Does the eurozone fall apart? Does the Chinese economy continue to expand? Does South America continue? We are embedded in a world economy – flows of capital that come into California, flow out of California. So that’s the external context that in the short term determines most of what happens. In the longer term, our education, our safe cities, our innovation, our inclusiveness by which we train the millions of immigrants that live here that don’t have English as their first language, how we deal with the increasing stratification by income of the American Society – those are the long term challenges. But this year, Congress has got to get off the dime and make some tough, tough decisions that will not be easy for Democrats or Republicans.

On whether he still has any presidential ambitions:

No, I think I've had my fill of that. I've run more than most living people. And, my work here is in California. And I said I would run, do what I could to fix the budget -- which is well on its way -- and to give the spur to innovation, which is the key to our future.

To listen to the full interview with Governor Jerry Brown, click the audio player above.